IT players register lower 3.9% growth due to rupee appreciation: ICRA

The aggregate growth of Indian IT services companies stood at 3.9 per cent during the fourth quarter ended 31 March, compared with an annual 17.1 per cent posted over the FY2013-2017 period and a 4.2 per cent growth in fiscal 2018. This is about 9.7 per cent in dollar terms, according to a note by ICRA.

The lower growth was due to the rupee appreciating by about 4 per cent versus dollar during the quarter. As per ICRA, Indian IT Services companies are expected to register an annual growth in mid-to-high single digits for the period FY2018-2021.
“The growth of Indian IT Services companies is impacted by lower demand led by uncertain macro-economic environment, lower deal sizes in digital technologies, cloud adoption and high competitive intensity from local as well as international players. Future growth will be supported by higher spend on digital technologies with larger deals spanning enterprise wise digital transformation, improving discretionary spends, continued cost benefit offered through outsourcing model and market share gains,” says Gaurav Jain, vice president, ICRA.
“While companies have increased spending on digital technologies and awarding new contracts, the overall IT budgets have moderated leading to lower incremental spends. The share of Indian players in Global IT Sourcing market stood at 67 per cent in calendar year 2017 (60 per cent in CY2012), however incremental gains are expected to be at a slower pace. Indian IT Services companies are in the midst of re-orienting their business models focusing more on higher end services such as IT consulting & emerging technologies (digital) and have made considerable progress so far, though they still lag behind international peers. We expect large Indian IT companies to grab a higher share of the digital services space over the next three years,” he adds.
In terms of verticals, Banking & Financial Services (BFS) growth has been muted over the last few quarters. Demand for the sector has been adversely impacted by current macroeconomic conditions impacting the banking industry including sustained low interest rates, continued focus on cost optimisation and managing their discretionary spends. The BFS segment growth is supported by digitisation efforts, cost optimisation, regulatory, compliance and security driven initiatives. The Insurance sector has seen good growth led by modernising of legacy systems and is supporting the overall growth for BFSI which contributes 30 per cent of ICRA’s sample set revenues.
The manufacturing verticals (17 per cent of ICRA sample set revenues) outperformed other key verticals with 5.8 per cent growth in FY2018 led by automation including internet of things, analytics, optimising supply chain and enhancing distribution channel effectiveness. With firming up of oil prices resulting in higher discretionary spends, ICRA expects the Energy vertical to perform better compared to previous few years.
As for margins, industry’s operating margins have moderated from 24-25 per cent to 22-24 per cent over the last few quarters.
“The trend reflects the challenging operating environment characterized by pricing pressure on commoditised IT services, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate,” Jain added.